It is no secret that consumers are increasingly making buying decisions and executing transactions through online, social and mobile channels. In fact, our recent studies suggest that over 50% of buying decisions are initially researched via social networks or other online and mobile applications. This shift in consumer behavior has profound implications for the payments sector, an industry that generates worldwide revenues of more than $900 billion each year.

Recognizing the size of the payments market and the opportunity for technology disruption, a new generation of payments applications is emerging to challenge the dominant traditional players. However, in order to be a winner in this Payments 2.0 era, companies must design products and services that address the evolving behaviors of today’s Web 2.0 merchants and online consumers.

Merchants

Merchants are increasingly being faced with a multitude of challenges for accepting and managing payments as consumers look to pay with a variety of new instruments, including mobile phones, prepaid cards and forms of credit. These acceptance issues are exacerbated by factors such as achieving PCI compliance (the global standard for card payments and fraud prevention), serving international customers, attaining merchant accounts and deciphering amongst various payment brands.

While large online merchants like Amazon have teams dedicated to solving payment issues, the average small/mid-sized enterprise does not. This has created an opportunity for innovative new business models attempting to minimize online SME pain points. A few companies are notable in their attention to addressing the needs of online merchants. For example, Braintree provides software for online and mobile commerce companies to seamlessly integrate non-disruptive payment functionality. Flexible and developer-friendly APIs, as well as a rapid install period, allow Braintree customers to achieve PCI compliance and payment functionality almost immediately. Another company, OzForex, enables SME’s to make large dollar international payments online. The company has partnered with a number of global, money-center banks to help customer’s settle international payables, pay employees overseas, and assist consumers with cross-border payment needs (i.e. foreign university tuition).

In addition, a large number of merchants remain rooted in offline commerce. Studies suggest half of SME’s do not even take credit cards; in certain industries like rent payment acceptance, the percentages are staggeringly lower – in the single digits. A number of interesting businesses are emerging to help mitigate these problems. Some, like Yapstone, are working to move arcane payment sectors (like rentals) into the credit card and online payment world. Others, like Square, are betting that mobile devices and tablets can become the cash registers/POS terminals of tomorrow by offering merchants a new way to not only accept payments, but track customers and purchasing data as well.

Consumers

The best payment companies will allow users to make payments where they are, which is increasingly not in a store with cash or credit card in hand. Three trends – limited access, microtransactions, and mobile – will be particularly influential in shaping consumer payment solutions. Limited access refers to the multitude of consumers (both internationally and in the U.S.) who are not able to attain traditional credit or debit card products (due to age, level of income or geography) to make online payments. Accordingly, these users are forced to look to third-party options for basic online shopping, bill pay and credit. Companies offering these products are often blending payment and financial services applications in new, innovative ways. For example, Rush Card provides branded prepaid debit cards and other financial services (such as healthcare discounts, insurance and personal financial management tools) to “underbanked” populations, which function like typical bank-backed debit cards (and run on the Visa network) but are loaded by cash. The company has distributed over 2 million cards to date.

Microtransactions within virtual games and other online social networks have also created a large, growing payments market that is now yielding over $2.5 billion in revenue annually in the U.S. alone. Micropayment solutions tend to follow one of two forms: 1) consumers using third-party, prepaid products that are built specifically to make virtual purchases (such as Paysafecard); or 2) a virtual world, or Web site, that offers its own form of currency (for example, Facebook “Credits” or Tencent “Q Coins”).